1. COVER LETTER

54 – 68 Kavanagh Street,
Southbank, Victoria

This report has been undertaken in accordance of the request to find and develop a site which will achieve highest and best use and maximum profitability.

Our company, Melbourne City Developments (MCD) has set out minimum requirements and parameters which must be met in undertaking this feasibility study.

These include:

• Selection of a site which is believed to have residential development potential.
• Using a preliminary development feasibility analysis to identify the highest and best use for the chosen site.
• The minimum required Internal Rate of Return is 20%
• Year on year returns is to be a minimum of 25%
• Equity contribution from Melbourne City Developments is to be approximately 30%

The following report gives an evaluation of the strengths, weaknesses, opportunities and threats of the subject site in regards to its location, current property market conditions and potential design options.

Various sites were considered for assessment as they had potential for residential development but through careful evaluation, the site in Southbank was considered to have the best prospects for this development.

Three alternative uses were considered for the site. These were residential, a residential/retail mix and full retail. Each of these uses was assessed through a feasibility analysis of financial, locational and market factors to evaluate which use is most feasible.

Upon completion of this research, we have concluded that the most feasible option for the site, which provides the highest and best use, is residential. This will involve a 40 storey uxury residential tower including car parking.

We trust that you will find this report both informative and helpful.

Yours sincerely,

Shawn Ng, Design Director
Grace Brown, Urban Development Planning Executive
Yan Yi Loh, Valuations & Financial Advisor
Tselyn Lim, Portfolio Risk & Operations Analyst
Robert Nguyen, Marketing Manager

2. EXECUTIVE SUMMARY

Property
Single block located at 54-68 Kavanagh Street, Southbank 3006

Lot Size
2,659m2

Purpose of this Report
To find a suitable site and determine its highest and best use. Upon determining this, undertake a Feasibility Analysis in accordance with our business objectives and required hurdle rates.

Location
Southbank is located on the Yarra River, just south of the Melbourne Central Business District. Located 1km from the city, it is characterized as Melbourne’s arts and cultural precinct. The suburb has a generally young professional population with the median age being 28 years old. The average individual income is $772 per week and the median unit price is $540,000.

Legal Constraints
The planning scheme states that the site is Mixed Use Zone (MUZ), however residential development is encouraged. It is constrained by Design and Development Overlays Schedule 18, 27 and 39. It is currently listed under one title, Volume 09864, Folio 129.

Highest and Best Use
A luxury residential tower of 40 floors including car parking has proven to be the most feasible use based on site, market and financial analysis.

Market Analysis
The residential property market is facing some risks but we expect the current market to be able to support current housing prices which is estimated to be a median of $540,000. The most likely purchasers are the investors followed by ‘executive class’ (i.e. high income couples).

Estimated Returns
We estimate the project to take 36 months from start until completion, achieving an Internal Rate of Return of 32.4% exceeding our hurdle of 20%. Development Profit is expected to be $83 million.

Recommendation
We recommend that you proceed with the Residential Development consisting 452 units, following a complete due diligence process including more detailed financial analysis that addresses the tax position. If possible, an option to purchase the site should be obtained whilst the due diligence is undertaken.

Site Purchase
The site is to be purchased for a price of $25.5 Million.

Construction
The construction phase of the project has been identified as being critical to the success of the project, and hence we emphasis the IRR result is sensitive to minor shifts in construction estimates.

Sales
We estimate that the dwellings will sell for at least $550,000 each at prevailing market rates.

2. BACKGROUND AND PURPOSE OF REPORT

Purpose
The purpose of this report was to find an appropriate site and undertake a feasibility study to determine the most suitable form of development which will give the highest and best use. Highest  and best use entails being financially feasible, physically possible, legally permissible and maximally productive. The site chosen to undertake this feasibility analysis is 54-68 Kavanagh Street, Southbank which is a single corner block. The analysis was undertaken with regard to our own business objectives which include:

• Finding a site which will lend itself to residential development
• Ensuring our development will meet our financial goals and hurdles
• The objective of the development is to generate the greatest profit within the specified time frame.

Method:
Our business in predominately residential development has meant that we have treated our development and feasibility as “a use in search of a site”. In addition to the chosen location, we also short listed two other sites, one in Vaughan Terrace, North Melbourne and the other on City Road in Southbank. Our final site selection was based on the decision that it is the greatest opportunity and best location to build a high quality residential tower.

Alternative uses were investigated for this site to determine the highest and best use. These alternatives include a mixed use development of residential & retail, and solely on retail. The feasibility for all these alternatives are included in the report (Section 10.3) were analysed to determine which use would best fit our criteria.

A careful market analysis of both micro and macro factors and a basic feasibility analysis of each option helped to determine which sort of development would be most feasible for the area. Once this was found, a Discounted Cash Flow analysis was completed to ensure the chosen option met the above mentioned development criteria. A risk analysis was then undertaken to ensure that risk scenarios can be effectively managed. The following report discusses all of our findings and final conclusion for development feasibility.

Disclaimer:
This report is intended solely for the purposes of this brief, to undertake a preliminary feasibility analysis. It must not be relied upon for any other purpose without prior confirmation from an authorized employee of Melbourne City Developments

13. RECOMMENDATIONS & CONCLUSION

The team at Melbourne City Developments strongly recommends that the board decide to proceed with the development “Gardens on Kavanagh” due to the following reasons:

• Maximum Profitability
• Net Development Profit of $83,500,000
• Net Present Value of $25,000,000
• Project Internal Rate of Return of 32.38%
• Return on Equity of 40.22%
• Developer’s familiarity with residential developments
• Opportunity to take advantage of the strong demand for residential apartments, due to low vacancy rates and continued strong population growth.
• Site has potential to capture sensational views over the CBD, Port Phillip Bay, Botanical Gardens and the Yarra River
• Proven high density residential development location on the doorstep of the Melbourne CBD.
• Vacant possession enables development to proceed as soon as planning approval is achieved.

Melbourne City Developments pride ourselves as a business to providing iconic developments in Melbourne and beyond.

This means that our resources and clientele base are second to none, and our familiarity with a residential development infers that marketing resources, construction, sales are all handled by a premium developer with experience in the industry, gaining confidence and trust from many consumers.

Thorough research and analysis, coupled with a visionary imagination, has led to inspiring Melbourne City Developments to design its latest work of art, Gardens on Kavanagh. But apart from aesthetically pleasing design, made to stand out in the horizon and the withstand the test of time, this development has been concluded to provide optimum returns to investors.

This is the right time. At the right place. Right now.

.